Mortgage Rates Are Rising Sharply -- but Home Buying Doesn't Seem to Be Slowing Down

Those who can pay cash may have the upper hand.

There was a point not so long ago when the idea of paying 4% on a 30-year mortgage was unthinkable. These days, buyers would be lucky to only pay 4% on a 30-year loan.

Over the past several weeks, mortgage rates have risen steadily. And if they continue climbing at their current pace, it won't be long before the average 30-year mortgage rate reaches 5% -- a level not seen since before the pandemic.

Not surprisingly, refinance demand has dropped sharply in light of rising mortgage rates. For the week ending March 25, the Mortgage Bankers Association reports a 15% drop in refinance applications compared to the previous week -- and a 60% decline from a year ago.

But interest in home buying is still fairly strong. While purchase mortgage applications fell 6.8% for the week, the seasonally adjusted purchase index rose 0.64% from a week ago. And while the index is still down 10.1% on a year-over-year basis, it shows that buyers are still interested in purchasing homes.

Granted, home buyers may also be less interested in financing a home purchase given the trajectory mortgage rates seem to be on -- which might account for the modest uptick in purchases but a drop in home loan applications. While the fact that buyers aren't dropping out of the market is a great thing for sellers, it means that home prices could stay inflated even as mortgage rates climb. And that could force a lot of would-be buyers out of the market.

When will rising mortgage rates impact home values?

If mortgage rates keep climbing, we should reach the point where buyer demand starts to wane and home prices come down as a result -- the operative word being "should." So far, that isn't happening. And that's a blow to buyers.

Last year, home prices were sky high, just as they are today. The main difference is that mortgage rates were extremely competitive throughout 2021.

That's not the case now. In the past, borrowers were subject to higher rates than what today's buyers face. But we're also beyond the point where we can call the current mortgage rate environment competitive.

Rather, it's fair to say that borrowing has gotten expensive. And that means a lot of buyers may have no choice but to put their plans to purchase a home on hold until property values start to decline.

Cash offers could increase

Since it's no longer as attractive to finance a home these days, we could also see an uptick in cash offers. This, too, puts everyday buyers at a disadvantage.

While investors and wealthier buyers may have the capital to pay for homes in cash, the average regular buyer typically does not. But since sellers tend to strongly favor cash offers, that means buyers in need of financing might have a hard time getting an offer accepted.

All told, it's a really tough housing market to navigate right now. While sellers can certainly benefit from continued buyer interest, those looking to get a mortgage might struggle even more in 2022 than in 2021.